ANTITRUST ISSUES IN INSURANCE MERGERS© ABA SECTION OF ANTITRUST LAW Recent Developments in Insurance Antitrust April 30, 2004 Novato, California © Keith D. Shugarman, Chair J. Todd Hahn, Senior Counsel Domestic & Foreign Competition Group

Total M&A Transactions U.S. Sellers (1994-2004)

Total H-S-R Transactions Reported (1994-2004) YTD

Total Insurance M&A (1994-2004)

2003 Insurance Deals By Segment 129 Insurance Deals

2003 Insurance Deals By Segment 2003 Deal Value in $Billions

Recent Mega-Deals

Key M&A Advisory Questions Are there any exemptions (e.g., McCarren or state action)? Are there any foreign, federal, or state filings? How long will it take? What issues will be analyzed? If there is a problem, can we fix it?

H-S-R Filings with FTC/DOJ Jurisdictional Elements: Size-of-Transaction Threshold: $50M Size-of-Person Test: $100M/$10M persons for deals valued at less than $200M; No Size-of-Person requirement for deals valued at greater than $200M. Exemptions Item 4(c) documents

Timing: FTC/DOJ Merger Review Process

Preliminary DOJ Review FTC Merger Screening H-S-R Filing Preliminary DOJ Review FTC Merger Screening FTC or DOJ Obtains Clearance 30 DAYS Meetings/ Presentations To Avoid Second Request Early Termination Second Request Company Responds to Second Request FTC or DOJ Staff Recommendation Oral and Written Presentations To Avoid Challenge No Suit 30 DAYS + Voluntary Extensions FTC: BC/BE DOJ: Front Office No Suit Commissioners or AAG No Suit Seek P.I.

What Issues Will FTC/DOJ Analyze? Nature and extent of competition between the merging parties Market definition Geographic Product Market participants and concentration Ease of expansion/entry (including state regulatory requirements) Market conditions which increase/decrease the potential for anti-competitive effects

Examples in Specific Insurance Industries Healthcare Title Disability Life

Health Insurance Mergers Investigated By FTC/DOJ United HealthCare Corp. / GenCare Health Systems, Inc. (1994) First second request: DOJ investigated but didn’t challenge merger creating 39-47% of HMO, 45% of PPO, and 41% of HMO-PPO enrollees in St. Louis. United HealthCare Corp. / MetraHealth Cos. Inc. (1995) First divestiture: United resolved Federal & State antitrust concerns by agreeing to sell MetraHealth’s HMO serving greater St. Louis. Wellpoint Health Networks Inc. / Health Systems Intl. Inc. (1995) No second request for proposed creation of second largest HMO in U.S.

Health Insurance Mergers Investigated By FTC/DOJ (cont’d.) Aetna Inc. / The Prudential Insurance Co. of Am. (1998) Seven-month investigation by DOJ & TX: Count I: reduction in competition in the sale of HMO and HMO-POS plans in Houston (44 + 19 = 63%) and Dallas (26 + 16 = 42%); Count II: reduction in competition to purchase physician services in Houston and Dallas; Consent decree required Aetna to divest NYLCare HMO operations in Houston and Dallas.

Health Insurance Mergers Investigated By FTC/DOJ (cont’d.) Anthem/Wellpoint Health Networks (2004) In October 2003, Anthem announced its intention to acquire Wellpoint Health Networks for $16 billion in cash and stock. Physician and hospital groups oppose the merger on grounds it would lead to further industry consolidation; Congressional members call for FTC investigation of deal. DOJ conducts a 4 month investigation, which it closed on March 9, 2004.

Health Insurance Mergers Investigated By FTC/DOJ (cont’d.) Anthem/Wellpoint Health Networks (cont’d) In announcing its decision, the DOJ explained that it had examined the following issues: 1. The competition for sale between Anthem and Wellpoint for the sale of health insurance products; 2. The possibility that a combined Anthem/Wellpoint would have buyer-side market (monospony) power; 3. Despite the lack of direct competition, whether the combination of complementary Blues plans might increase their incentives or ability to exercise monopsony power; 4. The possible effects of this deal on competition for the acquisition of Blues plans to the detriment of the plans’ shareholders.

Health Insurance Mergers Investigated By FTC/DOJ (cont’d.) Anthem/Wellpoint Health Networks (cont’d) Even as it was announcing the close of its investigation, the DOJ stated: “Although this particular transaction should not threaten to harm competition or consumers, we will continue to be vigilant in our enforcement of the antitrust laws in this area.” United Health/Mid Atlantic Medical Services (2004) United Health’s acquisition of Mid Atlantic Medical Services in February 2004 created the second largest US health insurer

Title Insurance Mergers Investigated By FTC/DOJ Lawyers Title Corp. / Reliance Group Holdings, Inc. (1997) FTC required divestiture of the plans and related agreements in seven counties in FL, three in MI, St. Louis and D.C. Commonwealth Land Title Insurance Co. / First American Title Insurance Co. (1997) FTC required dissolution of JV and refunds to customers in D.C. area. Fidelity National Financial, Inc. / Chicago Title Corp. (1999) FTC required divestiture of title plant interests in six CA counties.

Life/Home Service Insurance Mergers Investigated By FTC/DOJ AEGON N.V./Transamerica Corp. (1999) FTC terminated its 30-day review of $9.7 billion transaction creating the 3rd largest US Life insurer. Manulife Financial/John Hancock Financial Services (2003) In November 2003, FTC granted early termination of the 30-day waiting period on Manulife’s $10.4 billion acquisition of John Hancock.

Life/Home Service Insurance (cont’d) Bank One/Zurich Life (2003) In July 2003, FTC closed its investigation of Bank One’s $500 million acquisition of the U.S. life insurance business of Zurich Life. St. Paul/Travelers (2003) FTC granted announced early termination in December 2003 of the HSR waiting period. St. Paul/Travelers announced completion of the merger on April 1, creating the second largest US commercial insurer.

Disability Insurance Mergers Investigated By FTC/DOJ Provident Cos., Inc. / The Paul Revere Corp. (1996) FTC granted early termination. Provident Cos., Inc. / UNUM Corp. (1998) Consent decree resolved concerns regarding the sale of disability insurance sold to individuals in the U.S.

Restructuring to Alleviate FTC/DOJ Concerns FTC divestiture study and growth of big foot print mergers have changed the restructuring rules. Consent decree terms and conditions are much stricter (e.g., fix-it-first, clean sweep, monitor trustees, technical assistance). Licensing is disfavored.